After Bear Stearns, Some Silver Lining: Morgan Stanley, Lehman, Goldman Beat Analysts
Is Wall Street getting a better grip on the credit crunch crisis after last week’s Bear Stearns fiasco. There was a sigh of relief internationally as three leading global financial majors Morgan Stanley, Lehman Brothers and Goldman Sachs posted results which are better than analyst expectations. Morgan Stanley, the second largest securities firm in the US, posted a 42 per cent drop in fiscal first quarter net income after it absorbed $2.3 billion of write-downs. But the silverlining is that it was not all that bad as analysts had expected.
Morgan Stanley’s trading business has exhibited strength, while its peers Lehman Brothers and Goldman Sachs also said that strong performances at their management units helped lessen the blow of weakening credit markets. For instance, despite turbulent markets, Lehman posted record revenues of $968 million for the quarter ending Feb. 29, which is a 39 per cent more than the year-ago period, while net revenues at Goldman Sachs’ asset management division rose 23 per cent to $1.32 billion during the first quarter.
But can we say the firms are out of the woods completely? Unlikely. Goldman posted net losses on residential mortgages and securities of $1 billion, credit products produced another $1 billion loss, and investment banking returns were sluggish. Lehman Brothers was by far the worst-hit global institution as its stock collapsed by 46 per cent at one stage, forcing chief executive, Richard Fuld, to send a company-wide email to deny any liquidity problems.
It was expected that three major firms might meet a bad if not similar fate as Bear Stearns. Bear Stearns was last week snapped up by JPMorgan Chase for a mere $240 million just to avoid declaring bankruptcy. The Federal Government also announced a $30 billion support to the seventh largest US securities firm. Carlyle Capital Corp (CCC), a separate legal and business entity from U.S. private equity firm Carlyle Group, declared itself insolvent as it could not pay back over $16 billion debt to its lenders.
The results of Morgan Stanely, Lehman and Goldman came in as a relief as the Wall Street domino was spreading like a wild fire.
The crisis was triggered last year when risky mortgages made to US borrowers went sour putting pressure on lenders to tighten credit and making it difficult to value collateralised debt, mortgage portfolios and other fixed-income securities.
The credit crisis and the subsequent developments had also eroded markets elsewhere. In response to Bear Stearns, the sensex fell almost fell 6 per cent or 951 points down last Monday to close below the 15,000 level—the index’s second largest fall ever in absolute terms. The Fed rate cut by 75 bps somehow arrested the subsequent fall. Now with the big investment houses reportedly exhibiting stability and Visa having raised $17.9 billion to complete the largest initial public offering in the U.S., the markets wear but a firm picture. But for how long?
